Working Capital Loans vs. Cash Advance: Choosing the Right Funding for Your eCommerce Business

Author:  SellersFunding 

SellersFunding is a global financial technology company on a mission to empower growth for eCommerce sellers by providing the most comprehensive suite of financial solutions.

Managing cash flow as an eCommerce business is no easy feat. 

One day you’re rolling in the dough thanks to a huge payout. The next, an unexpected bill wipes you out and you’re left scrambling to cover your expenses, wondering where it all went wrong. 🙈

You’re not alone. 

An Intuit Quickbooks study found that 61% of small businesses experience cash flow issues, and 38% of them have been left unable to pay their debts because of it.

Also, PwC found that although working capital increased by 9.4% globally from 2017 to 2018, progress is improved by a minimal 0.1 days when assessed from a day-to-day context.  

This feast and famine cycle is so dangerous it can cost you your business.

Thankfully, there are a ton of funding sources you can tap into to take control of your cash flow and scale your business. For established eCommerce brands, the best options often boil down to capital loans or cash advances.

But which one is right for your business?

Let’s dive into the ins and outs of working capital loans and cash advances to find your perfect fit.

Working Capital Loans vs. Cash Advances: Here’s What We’ll Cover

• Find the Perfect Funding Match
• Working Capital Loans vs. Cash Advances: The Ultimate FAQ 

                – What are working capital loans?

                – How do working capital loans work?

                – What are cash advances?

                – What’s the rundown on cash advances?

                – What am I getting myself into?

                – How to Pick the Right Funding Source for You 

• Working Capital Loans vs. Cash Advances: The Results

Find the Perfect Funding Match

If you’re in eCommerce for the long haul, chances are you’ll have experienced the pain of low cash flow. 

You aren’t the first. A study by Babson and Goldman Sachs said the biggest challenge growing businesses face is securing capital.  

So, no matter what funding source you choose, it pays to find a suitable provider that’ll see you through the highs and lows. 

Before we jump into the details of working capital loans and capital advances, here are a few must-have traits to look for in a funding provider: 

• They’re an ally: Your ideal funding provider isn’t in the game just for money. They care about your goals, progression, and challenges, and will champion you to win. 
• They’re experienced: This isn’t your funding partner’s first rodeo. They’ve earned their stripes and know how to assess your business and recommend the best options for you.
• Fast response times: A funding provider that leaves you hanging around for a reply isn’t one you want to be relying on in a cash crisis. Check reviews to find out whether their processes and response times meet your standard. (Psst! At SellersFunding, we pre-qualify candidates in less than 5 minutes to speed up the vetting process.
• Reasonable charges: Do their fees match or beat industry norms? Sneaky add-ins can rack up quickly so make sure their fees are fair.

Working Capital Loans vs. Cash Advances: The Ultimate FAQ 

Now that you know what to look for in your dream funding provider, it’s time to delve into two of the most common funding sources for growing eCommerce sellers: working capital loans and cash advances. 

We’ve pulled together some of your most burning questions in this must-read FAQ:

What are working capital loans?

Working capital loans are flexible funding options secured to help cover the day-to-day expenses or short-term investments involved in running a business. Think: purchasing stock, renting warehouse space and launching new product lines. 

Working capital can come from funding avenues like:

• Bank loans
• Personal loans
• Business lines of credit 
• Invoice factoring

With fair, flexible access to working capital, you can launch new products without having to sacrifice other inventory, scale your advertising to reach new customers, stock up for peak season sales or even expand globally to new markets and countries.

How do working capital loans work?

Working capital loans are debts borrowed over a short time frame, i.e. 12 months. They have compounding interest rates, which can alter your repayment amount, and you clear them in fixed monthly payments. 

They’re often secured loans, guaranteed against your personal or business assets in case you default on payments. Consequently, if your business is unable to repay the loan, your credit score and finances could take a hit too.

Working capital loans are great for covering cash flow gaps during slow business periods. For example, if your business makes most of its cash in Q2 – Q4 but faces lean months in Q1, a working capital loan could help tide your business over until your busy period resumes.

Working capital helps keep your eCommerce business moving so that you can continue to take advantage of discount inventory, opportunities in new markets, innovative ad campaigns, etc. and make sure you’re 100% ready to capture as much profit as possible when your peak season hits. 

What are cash advances?

A cash advance (AKA capital advance) is an unsecured cash amount given by a funding provider to a business based on its future revenue. Your funding provider essentially purchases a portion of the business’ predicted sales at a reduced rate, which means capital advances aren’t debts.

Ecommerce businesses have greater flexibility than most brick-and-mortar businesses, but you’ll still have a heft outflow of cash for payroll, marketing and other business-related costs. It can be easy to underestimate these expenses when your incoming revenue is tied up in your marketplace or new business investments. 

While it’s normal to have cash flow gaps during slow seasons, ongoing negative cash flow can lead you down a negative spiral in your business.

This is where a cash or revenue advance can help. 

What’s the rundown on cash advances?

Still unsure? Let’s break this down. 

• Each time the business makes a sale, a certain percentage goes towards repaying the cash advance until it clears the balance. 
• There’s no set amount for what you’ll repay each month. It depends on your funding terms and how much revenue you make. 
• Both parties agree upon a fixed interest amount instead of a compounding monthly interest rate.

For example, if you have a bumper month, you’ll pay off a larger portion of your cash advance. But if you have a slow month, that’s less paid back.

Let’s look at a capital advance in action:

Let’s say your cash advance total is $80,000. Your agreed interest rate is 25%, and your amount repayable is $100,000.

Under this agreement, if your eCommerce store makes a $400 sale, the funding provider will take a 25% cut ($100). 

Likewise, if your brand pulls in $60,000 in a month, $15,000 will go towards clearing the cash advance balance. 

Funding providers often collect payments by taking a portion of your incoming card or marketplace transactions, so it’s easier to control and more convenient for your business

Not sure how to fill that cash flow gap? Find out more about our Revenue Advance.

What am I really getting myself into with working capital funding or cash advances?

As the saying goes: ‘Knowledge is power.’ Working capital can be a gamechanger in all the right ways for your business. But before you jump in, it’s essential to know what you’re signing yourself (and your business) up for.

Let’s take a closer look:

Advantages of working capital loans

• Affordable interest rates: Working capital loans have lower fees and repayment amounts than capital advances. They also have lower interest rates compared to other funding options like credit cards. This means more cash in the bank for your business needs. For example, average annual percentage rates (APRs) from alternative or online loans can have APRs ranging from 13%-71% in the US.
• Fix financial blips fast: Taking a low-interest pile of cash and tackling your shortfall could be all you need to dodge a full-blown crisis and stabilize your cash flow. A working capital loan helps you do just that, no fuss. For example, you can secure up to $1 million in 48 hours with SellersFunding.
• There’s an end in sight: With monthly repayments, you’ll have more certainty about when your repayment period will clear. Having an end date allows you to budget your capital with greater accuracy. 😍
• It’s your business. Keep it that way: Unlike funding methods like venture capital, which require you to give up a precious stake in your company, working capital loans don’t need business equity. You’ve worked hard to get this far. Why not secure capital and keep your business?
• No tax! Well, almost: In many cases, the interest you pay on a working capital loan is tax-deductible.

Disadvantages of working capital loans

• Painfully slow approval processes: The paperwork involved in securing a loan with some providers isn’t for the faint-hearted. You may have to endure numerous forms, background checks, document reviews, and painful wait-times to even have a shot at being considered.
• Those repayments: You have to pay working capital loans back regardless of your financial situation. There’s no way to sugarcoat it, so taking on a working capital loan places additional pressure on business performance.
• Your assets are on the line: If your business fails to pay up, you could find yourself saying goodbye to your personal and business collateral. Plus, your business and personal credit score could be negatively affected or you could even find yourself with court-ordered repayment plans, bankruptcy, or liquidation. Not fun!
• Floating interest rates can really sting: If you fail to secure a fair interest rate at the start, a floating interest rate (a rate that changes) could mean that you end up with an unaffordable repayment bill. 

Advantages of business cash advances

• No D-E-B-T: Use cash advances as your funding source to become truly shackle-free, and operate without daunting monthly payments hanging over you. Yes, you’ll still have to repay the amount you’ve secured, but this will be dependent on your sales performance. Phew!
• As ‘risk-free’ as it gets: Cash advances are the closest thing to getting ‘risk-free’ capital upfront to grow your business. Since you don’t have a set monthly payment amount, the funding provider assumes most of the risk if you end up in a position where you can’t pay.
• Hands off my stuff: One of the greatest things about capital advances is you aren’t required to cough up collateral to seal the deal. Plus, they rarely require credit score checks, so even in a worst case scenario, your personal finances won’t go down with it. This is good news considering a Federal Reserve survey revealed that 63% of startups’ credit score puts them in the high-risk category for traditional lending.
• Show me the money!: Without monthly payments, you’re free to blend in with other methods of funding. For example, let’s say you took on a cash advance to expand into a new territory. Soon after, you go out of stock and need to suspend operations to resolve the issue. With a cash advance, you’re free to continue your plans for expanding into a new region, while solving the problem at hand. 
• No waiting around: With cash advances, you won’t be hanging around for weeks on end to get approval. Whether your application gets granted or denied is based on your business health. According to the US Federal Reserve, capital advances have the highest approval rates of any lending source. The process is so quick you can have a decision in 24 hours with providers like SellersFunding. 😉

Disadvantages of business cash advances

• Yikes, that’s a high fee!: One downside of using cash advances is the fees. They can be considerably higher than those attached to a loan—but you can chalk it down to being the price you pay for greater flexibility.
• Not a long-term fix: Most cash advances run for up to 15 months, so they can’t fix any long-term financial problems in your business. If you can’t make the repayments in full while addressing the financial issue you’re trying to solve, it can end up hindering your progress. This is because the repayments reduce the amount of capital available, meaning you’ll still have to work on the financial problem, only this time with less liquidity. Consequently, you could find yourself in more financial difficulty a few months later and need additional capital from another source.
• No delay, you’ve got to repay: As cash advances are short-term funding sources, the time you have to repay them is also brief. If mismanaged, you could find yourself in the sticky situation of having to take out a loan to cover expenses, with no real certainty you’ll be able to cover the cost.
• Stacking can spiral out of control: If your business isn’t in a good place financially, combining different funding sources can be disastrous—leaving you unable to afford minimum payments.

It can be tough to know which funding option is right for you. Don’t go it alone. Speak with a SellersFunding expert today.

How to Pick the Right Funding Source for You

Choosing the right funding option starts with a look inside your business and personal circumstances. Knowing what you need and can afford will help you avoid wrong-fit funding. 

To gain greater clarity, ask yourself these questions:

• What do I need the funding for?
• Do I or my business qualify for the type of funding I have in mind?
• What are my business’ current obligations?
• How much debt can I comfortably afford to take on?
• What’s my business’ sales and financial health like right now? 
• What are my business’ revenue figures (current and predicted)?
• What plans do I have for my business in the next 6-12 months? New market expansion? Product lines? Launches? 
• How much control do I want over finances and revenue?
• Does my company have assets we can use to secure financing if necessary? 
• How important is flexibility in payment terms to me?

Assessing your wants and needs will help determine whether it makes sense to take out a working capital loan, cash advance, neither, or both. Then you can seek further advice from a professional.

Working Capital Loans vs. Cash Advances: The Results

Both working capital and cash advances can be a big boon to your business. But each has its benefits and drawbacks, and what may be perfect for one business might not be the right choice for another. 

It’s vital to analyze each option against your business’ obligations, goals, and revenue to determine the best fit, then choose the right funding solution for you.

If you’re ready to find out whether working capital or a cash advance is right for your business, we’ve got you covered. Click here to get started.

And remember, once you’ve got the funding for your eCommerce business all worked out, you’ll also need to make sure your customer service is on point. With Replyco, you can save loads of time and money on your customer messaging, while reducing stress and manual efforts. 

Book a live demo to see the Replyco software in action, or start your 7-day free trial today (no credit card required)!